Rising levels of inequality are the defining political and economic issue of our times. Middle- and working-class Americans, who a generation ago could afford to buy a home and save for their children’s college, are today struggling to make ends meet. Donald Trump owes his rise to power partly to his misdiagnosis of this malaise. Since the 1980s, he has argued consistently that trade deficits are at the root of the United States’ problems. In his view the chief culprit is China while the solution is tariffs.
There is much to fault in Trump’s account. Economist Michael Pettis argues that what is in fact distorting the US economy is global inequality, and that action needs to be taken to correct the imbalances that result from it. Mercantilist countries like Germany, Japan, and China, which aim to increase their wealth by increasing their exports, persistently consume much less than they produce and deal with the resulting excess by exporting goods and savings, principally to the United States. The refusal of national elites around the world to address growing inequalities has driven up costs for average Americans while undermining industrial production in the United States.
Pettis has been sounding the alarm about the unsustainability of global imbalances for more than two decades. He is the author of a number of books on the crisis of global finance and trade including The Volatility Machine, The Great Rebalancing and, most recently, Trade Wars Are Class Wars, which he coauthored with Matthew Klein. Western societies appear now to have reached an inflection point. It is unclear whether we will ever return to the post-1990s era of free trade.